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Advice for retiring types

This week, I want to look closer at an area of pensions which is certain

to continue to attract an increasing amount of attention and provide

endless interest and fees or commission for pension advisers not afraid of

a little additional technical detail, regulatory attention and,

consequently, danger.

Retirement income planning, until seven or eight years ago, consisted of

little more than a relatively simple assessment of the open-market option.

True, the adviser had to make sure they remained fully aware of the comings

and goings of leading providers in the market but, once this was

established, increases to the client&#39s income of 25 per cent or more were

commonplace.

Then along came staggered vesting or phased retirement as it seems to be

more commonly known now. I have to admit that, all those years ago, I

struggled to come to terms with the idea of staggered vesting. As a

director of DBS at the time, I was tasked with reporting on an idea put

forward from one of the leading providers of the strategy.

The idea had been marketed to us as an entirely new type of retirement

income policy which would entail the clients of DBS members giving up 1 per

cent of their fund annually to gain the undoubted flexibility offered by

the strategy. Of course, it is now fully understood by most advisers that

staggered vesting is simply a computer program model of a strategy of

phased encashment of pension fund units. But the complex flexibility

remains valuable.

Further investigation at that time of the potential market for staggered

vesting focused on the very small number of existing equity-backed annuity

options including (if my memory serves me well) two unit-linked and two

with-profits annuities. Strange that there has been very little increase in

the number of providers in this sector but more about this in the coming

weeks. It did not take long for the market to start looking for further new

and innovative retirement income products and strategies to broaden the

market away from conventional annuities.

In 1994, Equitable Life invented and launched the forerunner to what we

now generally know as income drawdown contracts. Its launch unfortunately

concentrated more on the tax avoidance scams than the real merits of the

contract for retirement planning and the Inland Revenue closed the

loophole. Sad, isn&#39t it, that Equitable could not hang around longer to

reap the benefits of its innovative thinking?

It has taken us the best part of half a decade to start to fully

appreciate the huge potential advantages of income drawdown but I believe

we have not yet scratched the surface of its true attractions.

More recently – and this is a trend which I know is going to gather pace

significantly over the next few years – insurers have introduced further

variations on the theme of retirement income options although these have

yet to strike a chord with most advisers.

Where are we now? Well, almost inevitably, the wider range of more complex

annuity options has raised the need for a more professional and educated

approach to retirement income planning and this has encouraged close

regulatory attention justified by the undeniable shortcomings in the

quality of advice given by a number of intermediaries.

Increasing adverse publicity has and will continue to deter clients and

advisers from proper consideration of the valuable opportunities offered by

flexible and equity-backed retirement income options.

This is a great shame and, in this series of articles, I would like to

examine some of the main issues which should be considered by advisers and

brought to the attention of clients in determining an appropriate

retirement income strategy. I will start to identify how the process of

retirement income planning can be refined to ensure adherence to regulatory

requirements.

Throughout these articles, I will concentrate on the three main risks of

flexible retirement income options – investment return, interest rates and

increasing longevity. The third of these main risks has, unfortunately,

been largely overlooked by many financial advisers in the past, ensuring

immediately a non-compliant sale (although not necessarily indicating bad

advice) and so I will look first at that issue.

The articles will not focus only on these risks as I will also be looking

at the attractions of alternative retirement income options, the main ones

being investment return, interest rates, death benefits and flexibility.

Charges will also feature prominently as we proceed.

First, longevity. People are living longer. The last published mortality

tables (PA90) related to mortality experience up to the year 1990. These

tables seemingly indicate that a retiring male, aged 60, can expect to live

around three years longer than the equivalent mortality tables published 10

years earlier (PA80) which themselves seemingly indicated a similar

improvement in male life expectancy. Female life expectancy, although also

increasing, fared slightly less well, indicating over each decade a

two-year improvement among females of retiring age.

Although we cannot yet expect to be provided with the next mortality

tables (I assume they will be called PA00), it is my understanding from

talking to a couple of leading insurance company actuaries that very

similar and continuing improvements in life expectancy will be evidenced in

the last decade of the millennium.

If this is true – and I have no reason to doubt the word of these

actuaries (other than because they are actuaries) – this would mean that

male life expectancy has increased by around 10 years and female life

expectancy by around six years over the last 30 years.

What is certain, as evidenced in medical journals, is that life expectancy

is continuing to rise, with most findings indicating that this trend is

likely to continue for the foreseeable future.

What has all this got to do with flexible retirement income options? A

huge amount, actually. Making retirement income recommendations in the

absence of an understanding of this trend is not only dangerous but is

certain evidence of non-compliant and bad advice to the client. It

therefore merits at least one article, starting next week.

Keith Popplewell is managing director of Professional Briefing

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